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How much life insurance do I need after I retire is a question that everyone should ask themselves, especially if they have dependents and you still have large loans or bills to pay.
Life insurance is a tool to ensure your bills are covered if you pass on to the great big gig in the sky. (Pink Floyd reference) Life insurance provides the ones you leave behind the funds necessary to pay everything off so that they can live their lives comfortably without having to worry about bills and money after you are gone.
Types of Life Insurance
What is Term Life Insurance?
Term Life Insurance is quite simple, you pay a certain amount per month to an insurance company for a certain amount of coverage ($’s) if you should die during that predetermined term. Term insurance is coverage for a certain period of time 5, 10 or 15 years or more.
The younger you are the cheaper it is, as you get older there is more risk the insurance company takes on as we all die eventually, so the older you get the more expensive your insurance will be.
The strategy to term life is to understand your current financial situation and get the right amount of term insurance to cover your expenses so your loved ones are not left with the financial burden when you’re gone.
What is Whole Life Insurance?
Whole Life Insurance is sold to the prospective buyer as an investment when the term ends the buyer will get a certain amount of money prescribed by the plan. The reality is there are far better ways to invest your money life insurance is not one of them. Whole life insurance is sold as an investment to the buyer. Never buy whole life insurance it only benefits the insurance company.
What is Universal Life Insurance?
Universal life insurance is a combination of term and whole life insurance. The buyer will get a set amount of death benefit proceeds plus there is a build up of funds over time that is tax-free.
Universal life insurance is another approach insurance companies will try to sell, it makes big money for the insurance companies. You should steer clear of universal life insurance.
When you are considering retirement ask yourself: how much do I owe and how much will my partner or family need to maintain the same lifestyle they have now?
Life Insurance Needs Analysis (simple overview)
Family 1
- has two kids that are finished university or college
- House is half paid off with 200K still owing
- Fancy BMW still has 30K left on the loan
- Credit card bills total 20K
- Your survivor’s benefit (what your partner will get if you die) from work is 150K
- Funeral Costs 10K
How Much insurance does Family 1 Need?
The simple answer is they owe 260K, but the partner will receive a lump sum of 150K, so in the simplest way they’ll need approx 110K in insurance to cover off the remaining costs.
Family 2
- 3 young children in high school
- House mortgage of 400K
- 1 Car 1 Minivan 45K owing on both
- Credit card bills totaling 15K
- Survivors benefit of 100K
- Funeral costs of 10K
How Much Insurance does Family 2 need?
Conservatively they’ll need approx 670K in insurance. They’ll need money to pay for college or university (approx 100K for each child) and enough to pay off all the bills. The overall need is 770K but the survivors benefit will provide 100K.
How Much Insurance Do I Need After I Retire?
You shouldn’t need much, hopefully, your house is nearly paid for, most of your bills are paid and the kids are done school and starting their own careers and families.
If this is not the case then you will need more.
Remember that as you get older your bills should be decreasing (notwithstanding utilities) and your investments should increase as you can increase the amount of money you’re putting into investments (because you don’t have as many bills) thus creating more retirement income.
What this means is as you get older the amount you need for life insurance lessens, as bills are being paid down, (your mortgage, for example, should be going down not up) so therefore you need less coverage to pay them off should you die.
Other Insurance questions?
You may want to leave a financial gift to your kids or loved ones. Some people wish to ensure that their family is well taken care of after they are gone. This is fine and life insurance can facilitate them getting a certain amount of money when you are gone. Again, I would argue that if you invest your money well, you would not have to worry and that your family will get some or all of the remaining of those investments should you decide to do that in your will.
You may want to leave money to a charity. Many people wish to donate money to a charitable cause, again life insurance could that vehicle to do that. There are better ways to do this other than life insurance. An investment trust could be set up to do the same thing at a far cheaper rate and a better return on your dollar.
You need to consider pensions and will your partner get yours should you die. Should I get hit by a bus tomorrow, my work plan provides my wife double my salary plus an ongoing pension that I would have received if I was retired. We’ve adjusted our life insurance (term) is to account for this.
My wife’s plan is not as generous so we have more insurance on her to cover the remainder of the mortgage and any extra bills we may have. The insurance we have on me is less as my work plan provides a better payout to her so we need less coverage on me.
Our plan is to have nothing owed when we retire. The proper amount of life insurance for when you retire is a balance between what you owe and what you need. Every insurance agent should address this if they don’t you should be concerned.
You want to ensure that there are funds for your partner so that he or she does not have to start to work for an income or work longer.
There is much to consider, but the takeaway with determining how much life insurance you need when you retire depends on your current financial situation and where you will be when you retire.
Is Life Insurance Bad?
Life Insurance is really important, but you have to understand that if most everything is paid off and your dependents are financially taken care of, meaning they are working supporting themselves, they have a pension and should have their own life insurance to cover their bills at that point in their life, the reality is you don’t need life insurance, or very little life insurance.
BE WARNED!
You have to be really careful, insurance agents are typically paid on commission, this means the bigger the life insurance policy they sell the bigger payout for them. If you have a Whole or Universal policy the payout is even bigger for the agent so of course, they are going to try to sell you the FATTEST policy they can.
You do have recourse if you get a policy and find out depending on where you live you should have up to 30 days to get out of the policy if you find out you made a bad decision.
Summary
If you have investments, your dependents will get some of that if there is any left. I’ve mentioned many times in this blog that you’re going to live longer so it’s really important to have and financial plan that accounts for this.
Using a life insurance plan as an investment vehicle is not the right way to grow your money so don’t get “sold” by an agent that life insurance is a great way to save for the future.
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Until next time…
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